Correlation Between Stepan and STMicroelectronics

Can any of the company-specific risk be diversified away by investing in both Stepan and STMicroelectronics at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Stepan and STMicroelectronics into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Stepan Company and STMicroelectronics NV ADR, you can compare the effects of market volatilities on Stepan and STMicroelectronics and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Stepan with a short position of STMicroelectronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Stepan and STMicroelectronics.

Diversification Opportunities for Stepan and STMicroelectronics

0.86

Correlation Coefficient

Stepan  STMicroelectronics

Very poor diversification

The 3 months correlation between Stepan and STMicroelectronics is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and STMicroelectronics NV ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on STMicroelectronics NV ADR and Stepan is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Stepan Company are associated (or correlated) with STMicroelectronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of STMicroelectronics NV ADR has no effect on the direction of Stepan i.e., Stepan and STMicroelectronics go up and down completely randomly.

Pair Corralation between Stepan and STMicroelectronics

Considering the 90-day investment horizon Stepan is expected to generate 2.59 times less return on investment than STMicroelectronics. But when comparing it to its historical volatility, Stepan Company is 1.24 times less risky than STMicroelectronics. It trades about 0.15 of its potential returns per unit of risk. STMicroelectronics NV ADR is currently generating about 0.31 of returns per unit of risk over similar time horizon. If you would invest  1,995  in STMicroelectronics NV ADR on April 20, 2025 and sell it today you would earn a total of  1,260  from holding STMicroelectronics NV ADR or generate 63.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Stepan Company  vs.  STMicroelectronics NV ADR

Stepan Company

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Stepan Company are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite unsteady fundamental indicators, Stepan disclosed solid returns over the last few months and may actually be approaching a breakup point.

STMicroelectronics NV ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in STMicroelectronics NV ADR are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, STMicroelectronics displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Stepan and STMicroelectronics

The main advantage of trading using opposite Stepan and STMicroelectronics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stepan position performs unexpectedly, STMicroelectronics can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in STMicroelectronics will offset losses from the drop in STMicroelectronics' long position.

The idea behind Stepan Company and STMicroelectronics NV ADR pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Commodity Directory module to find actively traded commodities issued by global exchanges.